Credit card expenses and payment of credit card

by Subhash Raval
(Tucson AZ.)

Is using a Credit card an expense at the time of use or at the time I pay credit card bill?

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Subhash,

This can be done a couple ways.

First, I want to say that according to Generally Accepted Accounting Principles, if you're using the Accrual Method of Accounting, then the expense occurs at point of purchase. If you're using the Cash Method, then an expense occurs when you make the payment.

What I do is wait til I get the credit card statement each month. I then post debits for the credit card charges to the expense accounts and I post the credit to a liability account I call 'Credit Card Payable'.

Then when I make the credit card payment, I post the debit to 'Credit Card Payable' and the credit, of course, to 'Cash in Checking'.

BUT

If you prefer, you can post an entry every time you use the card - post a debit to the expense account and a credit to 'Credit Card Payable'.

The problem with this approach is if you have 40 charges on your credit card each month, that's a lot of entries, and also you're more apt to forget to post something that way.

If you do it this way, make sure you reconcile your credit card charges with your credit card statement each month, to make sure you didn't forget to enter any charges as an expense and a liability.